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Employer insolvency – Part I: What employees should consider

After airberlin, now also Germania. All attempts to save the airline have failed. We take this as an opportunity to shed light on what the insolvency of a company means for its employees.

In the first part of the article, we look at what insolvency actually means, how insolvency proceedings work and how employees can get their money despite insolvency.

The second part will then deal with the conditions under which employees can be dismissed due to their employer’s insolvency and what options they have in the event of dismissal.

What happened in the Germania case?

Financial difficulties at the airline Germania became known at the beginning of January. The January salaries could only be paid to the employees with a delay. On February 4, Germania finally filed for insolvency. The insolvency administrator then tried to find a buyer to take over the ailing airline. Despite numerous interested parties, the attempt failed. The airline’s approximately 1,700 employees are now threatened with redundancy.

What does insolvency mean?

Insolvency initially only means that a company or private individual can no longer pay its bills on time. If this is the case, formal insolvency proceedings must be initiated to ensure that creditors receive their money – as far as possible. All creditors should be satisfied jointly, i.e. the remaining assets should be distributed as evenly as possible (Section 1 InsO).

Creditors of a company are, for example, suppliers, customers, business partners, landlords, etc. Important for employees: If a company has employees, they are also considered creditors. The company owes the employees their salaries. Because salaries are often a significant cost item, it is often the case that the company is no longer able to pay its employees’ salaries and becomes insolvent as a result. This was also the case with Germania. For the employees, it is then a matter of not losing their claims to outstanding salary payments.

How do insolvency proceedings work?

If the employer is insolvent or over-indebted, it must apply to the local court to open insolvency proceedings. Germania did this at the beginning of February. After filing for insolvency, so-called “provisional insolvency proceedings” are opened and a provisional insolvency administrator is appointed. The administrator has three months to check whether the company can raise enough money overall to at least partially satisfy all creditors and cover the costs of the insolvency proceedings. Only if this is the case will the actual insolvency proceedings be opened. Otherwise, the insolvency proceedings will be rejected by the court (Section 26 InsO). Then things look bad for the creditors.

That was the case with Germania. Initially, there were apparently numerous interested parties who wanted to take over the ailing airline. However, time was probably too short. In order for the airline not to lose its important traffic rights, it would have had to maintain a minimum level of flight operations. Otherwise, the licenses would have been assigned to another airline by the Federal Aviation Office (LBA) in order to guarantee flight operations in Germany. But there was no money for this. And ultimately the aircraft too. Because they were only leased and the leasing companies were pressing for payment and were not prepared to grant any further delays.

Insolvency administrator as new contact person

If the actual insolvency proceedings are opened, all rights and obligations of the insolvent employer are transferred to the insolvency administrator (Section 80 InsO). In simple terms: the insolvency administrator becomes the new “boss” of the employees and is therefore also responsible for the payment of wages. He is also authorized to issue instructions to the employees. In insolvency, the right to issue instructions may, under certain circumstances, extend further than is usual in an employment relationship. Insofar as the purpose of the insolvency requires it, the insolvency administrator may also assign the employees lower-value work than they have previously performed.

The insolvency administrator is also responsible for issuing employment references if employees were dismissed after insolvency proceedings were opened.

How do I get money if my employer stops paying?

In the event of the employer’s insolvency, employees rightly wonder where they will get their money if the employer can no longer pay their salaries. It is important that all claims are filed in writing with the insolvency administrator (Section 174 (1) InsO). The insolvency court sets a deadline for this.

Check payroll accounting

For employees, this means that they should first of all carefully check their pay slips from previous months. If amounts are not listed in full or the full amount of money has not been transferred, the claims should be listed and registered. It is also often worth taking a look at the employment contract to see whether there may be other outstanding claims that are not immediately apparent. These include, in particular, vacation pay, Christmas bonuses, annual bonuses and commission claims. In many cases, however, these claims are subject to preclusive periods. If the claims are asserted late, the claims may lapse.

Insolvency money

Employees whose employer has filed for insolvency can apply to the employment agency for insolvency money, §§ 165 ff. of the German Social Code III. This is a one-off payment that employees can receive on application as compensation for missing wages. It is paid out in the amount of the net salary and can cover up to three months’ salary, depending on how long the provisional insolvency proceedings last. Outstanding special payments such as Christmas bonuses or vacation pay are also paid. The wage claim against the employer is transferred to the employment agency upon receipt of the insolvency money.

An application for insolvency benefit must be submitted to the local employment agency within two months of the insolvency proceedings being opened. As approval can take some time, it may also be possible to apply for an advance payment.

Who pays the wages after insolvency proceedings have been opened?

Once the actual insolvency proceedings have been opened, the Federal Employment Agency no longer pays insolvency money. The insolvency administrator must then ensure that wages and salaries are financed from the available funds. There is a special feature here compared to other liabilities of the insolvent employer: the employees’ remuneration claims are so-called preferential insolvency claims. Employees therefore do not have to join the ranks of other creditors with their wage claims, who generally only receive their claims after the end of the proceedings, provided there is sufficient money available. If the insolvency administrator does not meet the claims, the employees can file an action against this with the labor court.

Should you agree to a waiver or deferral?

Employers may ask their employees to forgo vacation or Christmas bonuses in the event of financial difficulties. Even if they themselves want the company to get better soon, employees should not agree to this without further ado. In very few cases can companies really recover by waiving such payments.

Employers can also ask their employees to defer outstanding payments, i.e. to agree to receive the money at a later date. However, there is no entitlement to this. Employees should check carefully whether they want to agree to this. There is a high risk of not being able to enforce the claim at a later date.

Disadvantages with unemployment benefit

Deferrals and waivers can also lead to reductions in unemployment benefit. This is because unemployment benefit is generally calculated on the basis of the actual salary paid. If the employee waives the amounts or agrees that they will only be paid later, the unemployment benefit will be reduced. If, on the other hand, it is not paid simply because the employer has become insolvent, the unemployment benefit is generally not reduced.

Caution is therefore advised when employers ask their employees to agree to a waiver or deferral.

In Part II, you will soon be able to read about the specific steps employees should take due to their employer’s insolvency and the conditions under which they may be dismissed.

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